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Magnetic stripe credit card nearing its end
In an effort to combat fraud, the magnetic strip credit card which first came about over 50 years ago, and has since become a big part of Americans everyday lives, may now be coming to an end. The magnetic stripe credit card technology was invented by integrating tape-recorder-like magnetic tape to a credit card. During the 1950s, scientists started using magnetic tape to record data, which set the stage for the mag stripe card.
With credit card fraud on the rise during the 1960s, clerks had to manually compare the account numbers printed on cards with printed lists of accounts associated with fraud. This process was finally automated with the addition of the magnetic stripe; the number could be easily recognized by a computer with only a single swipe. The account number could also be transmitted over a phone line to a centralized list of fraudulent accounts. However, as the mag strip card approaches its 50th anniversary, it is looking as if this old and outdated technology may be on its last leg.
In 2005, Europe-based banks converted mag strip cards into the chip and PIN system, wherein a safer microchip embedded in the card performs the majority of security functions. Recently, the European Payments Council passed a resolution that mandates the use of magnetic stripe fallback (be restricted) to exceptional cases and allow banks to refuse magnetic stripe transactions if they so wish. And according to a recent banking blog, the council wishes to kill the old magnetic stripe. European card issuers have been fed up since the Heartland Payment Systems breach,” said Avivah Litan, a banking analyst at Gartner, speaking about the theft of millions of credit card numbers from the payment processor in 2009. Stolen account numbers are not useful for in-store fraud where chip and PIN cards are needed, but they still hold great value as magnetic stripe cards are easily forged by criminals.
The mega-million-dollar investments they made in chip cards were defeated by their cardholders shopping, traveling and eating out in the U.S. using their mag-stripe enabled credit and debit cards … European issuers have been talking about stopping their cardholders from using the mag stripe on their plastic cards since that time, and they are still fed up, said Litan.
As fraud-fighting efforts began to develop in the 1980s, international long-distance phone calls throughout Europe were very costly. Since credit card transactions were run via a telephone line, this gave European banks additional incentive to secure their credit cards by creating a fraud-fighting system. Tiny computer chips were placed on every card, which were used for validation without the need to contact a central bank. Users would enter PIN codes, which can be compared with data on the chip for authenticity purposes. On the other hand, telecommunications costs in the U.S. were relatively inexpensive ; thus, U.S. based banks maintained their centralized fraud system and continued using merchants phone home with every transaction.
In the U.S. it cost a quarter to clear a transaction. In Europe, the costs were much higher. So they solved the problem by throwing more money at it, said Jun. Their system has been upgraded more quickly because their fraud rates required it.
Though the payments industry in Europe expects that its declaration will urge US banks to upgrade their systems, there is only little chance that US card issuers can be pressured to quickly use the Chip and PIN system. Several attempts to issue smart card have failed. Jun said it is possible that the US system will skip the European system and adopt smarter card technology, allowing users to make payments wirelessly.
